On the Tragic Dimensions of the Greek Economic Crisis By

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					             On the Tragic Dimensions of the Greek Economic Crisis

                                   By Ioannis N. Grigoriadis

                                        Bilkent University

Hubris, Ate and Nemesis are three minor Greek deities, mostly remembered today

for their function in ancient Greek drama. Hubris symbolizes arrogance, deviation

from virtue or else arête. Ate refers to an act of folly, a direct consequence of hubris

which provokes the wrath of gods and precipitates their intervention. Nemesis is the

retribution of divine justice, painful, didactic and necessary to restore world balance

and order. The ongoing multifaceted crisis which has befallen upon Greece since

October 2009 can also be approached through the lens of this classical trio. This

study aims to explore key events in recent Greek political history which paved the

way for the outbreak of the country’s most serious crisis since the 1946-1949 Civil

War, from hubris to ate and from ate to nemesis.

The Moment of Hubris

The Rise of a Debt-financed Quasi-State Economy

1974 was a turning point in Greek political history. Seven years of a brutal military

regime came to an end, but only at the cost of a humiliating military defeat in Cyprus

and the occupation of 37 percent of the island’s territory by Turkey. This was not

accepted by the Greek public opinion which indulged with the idea that it was not

military defeat but the leftist youth that brought the junta down. The new

    Paper presented at a GloDem panel at Koç University on 5 January 2011.

democratic government led by Konstantinos Karamanlis had a daunting task: to

contain the damage of the Cyprus defeat by forcing Turkey to withdraw from the

island and by restoring Cypriot sovereignty, consolidate democracy and redefine the

country’s strategic orientation. It was the political acumen of Karamanlis that led to

the firm decision to pursue membership of the European Economic Community

(EEC). This would not only help consolidate Greek democracy but also irrevocably

link Greece’s fate with the West. “We belong to the West” was one of Karamanlis’

favorite quotes. His vision did not meet with much applause. It faced stiff opposition

by a populist and charismatic former US Professor. Andreas Papandreou questioned

the fundamentals of Karamanlis’ vision and counter-proposed a third-worldist,

nationalistic path for Greece, vehemently objecting to Greece’s application for EEC

membership and promising to remove Greece from NATO as soon as he came to

power. “Greece belongs to the Greeks” was Papandreou’s nationalistic-cum-

demagogic response to Karamanlis’ quote. When he did come to power in 1981,

though, Papandreou swiftly reneged on his promises. Greece remained a full –albeit

often problematic– member of EEC and NATO. Papandreou’s administration was

instrumental in healing the wounds, which the 1946-1949 Civil War had left. Yet it

failed to stand up to the circumstances and maximize the benefits of Greece’s EEC

membership. At the time of its accession, Greece’s finances were faring well,

economic indicators were not bad at the European level. It was under the

Papandreou administration that public deficit and debt rose sharply. These

borrowed funds were not primarily spent with the aim to promote infrastructural

development, but to subsidize consumption. Pay raises in the public sector were not

linked to productivity, while inflowing EEC funds only made the pie to be disbursed

bigger and facilitated the emergence of dependency relations between the state and

parts of the private sector. This bode well with Greek public opinion. Under

Papandreou Greeks began to be accustomed to a debt-financed perpetually

improving standard of living. This penetrated both political elites and the public

opinion. In due course, social and political perceptions of public reason were shaped

accordingly. Politicians who warned about the disastrous consequences of these

policies were repeatedly punished in parliamentary elections and marginalized.

Cassandra was never popular in ancient Greek tragedy.

       Even the end of the Cold War failed to have a catalytic impact on public

discourse. With the exception of the 1990-1993 Mitsotakis government which

attempted some economic liberalization reforms, statism remained dominant. Any

views which championed fiscal austerity, meritocracy or the need to privatize were

quickly dismissed as “neo-liberal.” Populism became a dominant element of Greek

public discourse which had long-term disastrous effects on two key sectors, higher

education and state bureaucracy. Higher education fell victim to sweeping legal

reforms which led to the colonization of higher education by party factionalism.

While university students were in theory given the strongest role in the management

of universities, these powers were in practice exercised by political-party controlled

student groups, which cared less about higher education per se and more about the

political careers of their members and short-term political party gains. Academic

merit seemed to matter little, while not excellence but the least common

denominator became higher education’s guiding principle. State bureaucracy lost its

elite characteristics, as it was colonized by party clients. It was soon infected by

chronic inefficiency, nepotism, clientelism and corruption. “May he make a small gift

to himself, but no way 500 million drachmas!” was Andreas Papandreou’s infamous

response to a corruption allegation about the chief of the public electricity company.

Such tolerance towards corruption soon led to its de facto social exoneration. Tax

evasion grew stronger, while an inefficient tax-collecting bureaucracy gave just the

wrong incentives by penalizing the honest tax-payers. Moreover, a culture of anomy

rose, which banalized low-intensity criminal acts, such as vandalisms or

environmental felonies. Due to their special “asylum” status, a legacy of the

dominant post-junta distrust against the state, universities were turned into venues

of all sorts of illegal activities by students and non-students. Populist attitudes went

further than higher education. The decision of PASOK’s government to abolish –in

effect– state experimental schools and limit grading and examinations in public

education reflected a wider trend in which merit was considered divisive and

marginalized. This had a severe long-term impact on the youth. Many Greek

youngsters appeared more interested in securing a well-paid and lazy state position

by means of clientelism rather than improving their skills through education and

seeking success through their entrepreneurial spirit. In addition, increasingly

generous pension and social benefit policies in tandem with the deterioration of the

demographic characteristics of the Greek labor force led to the undermining of the

stability of the Greek social security system.

       How could Greece get away with all these for so long? It was a set of

countervailing events which led to the reinforcement of Greek economy and

camouflaged soaring structural imbalances. Greece became the beneficiary of an

exceptional amount of European financial aid, which much exceeded the post-

Second World War Marshall Plan. These funds were disbursed with the aim to

narrow the gap between Greece and the more developed EU member states and

helped improve the country’s infrastructure. The new Athens airport and metro, the

Egnatia highway, the Rion-Antirrion bridge were only few of the infrastructure

projects built with the generous support of the European Union which created GDP

growth and employment opportunities.

       In addition, Greece benefited from the end of the Cold War which found it on

the winning camp. While acrimonious relations with Turkey meant that Greece could

not significantly reduce its defense budget, a rare opportunity emerged for Greek

entrepreneurship. Greece’s northern neighbors, members of the Eastern bloc, were

on the losing side and had to undergo a painful economic and social transition.

Greece’s economic “hinterland” was reopened, an uncharted territory for Greek

companies. They were among the first to invest in countries like Bulgaria, Romania

and Albania and were handsomely rewarded. This also helped raise the Greek GDP.

Meanwhile, shipping, Greece’s most extrovert and competitive economic sector,

greatly benefited from globalization and the rise of the BRIC countries. Shipping

energy and raw materials to the China and India and other emerging economies and

shipping manufactured products from them to the global markets allowed Greek

shipping to thrive in the 1990s. While most shipping companies were operating

abroad, their global success had major positive effects in the shape of increased

remittances towards Greece and investment in other sectors of the Greek economy.

Moreover, post-Cold War Greek economy benefited from immigration. The arrival of

more than one million regular and irregular immigrants from Southeastern Europe,

the former Soviet Union, the Middle East and the Indian subcontinent revitalized the

Greek economy and gave a critical –if only temporary– boost to its competitiveness.

       These events limited the deleterious effects of growing structural

shortcomings. Their contribution to Greece’s formal and informal economy was

crucial for the economic growth of the late 1990s which allowed Greece’s entry to

the Economic and Monetary Union (EMU). They also shaped the perceptions of

Greek political elite and public opinion. It felt like the questions of fiscal bureaucratic

reform, fiscal responsibility and competitiveness could be perpetually defied. The

conviction that the country could indefinitely live beyond its means was the defining

moment of Hubris.

A Moment of Ate

Eurozone Membership and its Implicit Promises

Greece’s membership of the Eurozone was undoubtedly a historic success. It is to

the credit of the Simitis government that Greece was accepted to the European

Economic and Monetary Union (EMU). Despite the occasional use of “creative

accounting,” it remains true that Greek economic and financial indicators strongly

improved in the late 1990s. This allowed Greece to adopt the Euro in 2001. Greece’s

national currency, drachma, was not really missed, as it was linked with consecutive

devaluations, inflation and monetary instability. The new Euro era was hailed by

both elites and the public opinion, as it heralded a new era of monetary stability.

Greece was now equal member of one of the world’s strongest economic entities

and could easier claim now a regional leadership role. Securing the EU membership

of Cyprus and helping resolve the Cyprus issue, promoting Turkey’s EU membership

as a tool of Turkey’s democratization and resolving long-standing bilateral disputes,

as well as promoting the European integration of Greece’s northern, Southeastern

European neighbors were key Greek strategic targets which became more feasible

within the Eurozone. Yet what both the Simitis and the Karamanlis government

failed to make clear was that Greece’s Eurozone membership came with some

invisible strings attached. By voluntarily giving up national monetary policy, Greek

governments were committed to pursue competitiveness with policies other than

devaluing the drachma and abstain from reckless borrowing. This meant reaching

levels of efficiency in policy-making which far exceeded their recent record. This

assumption proved to be farfetched. No real change occurred in the economic

policies of the Greek government. Instead Eurozone membership appeared to give

the wrong incentives in the absence of an effective Eurozone control mechanism.

The existence of powerful veto groups in the Greek public sector enjoying strong

links within both big parties meant that any reform attempt by maverick ministers

would remain stillborn. The second term of the Simitis administration was

characterized by a gradual relapse to fiscal laxity. Absent any effective policy

measures, the competitiveness of the Greek economy plunged, which constituted

one of the key pillars of the contemporary Greek crisis.

       The situation sharply deteriorated during the 2004-2009 administration of

Kostas Karamanlis. Despite his recurrent reform rhetoric, the nephew of the Prime

Minister who had pushed Greece into the European Economic Community in 1981

led arguably the worst government in recent Greek political history. Low interest

rates secured by Greece’s Eurozone membership allowed the Karamanlis

government to sharply increase borrowing to support a growing and increasingly

inefficient public sector. Lavish public spending was also instrumental in appeasing

numerous social groups, such as farmers, trades unions and civil servants and

maintaining high popularity rates for Prime Minister Karamanlis and his party.

Creative accounting was applied more intensively than ever to disguise yawning

current account deficits and the steep rise of public debt. Meanwhile, corruption

reached extraordinary proportions, even for the standards of a country with a rather

poor record in public sector integrity. News about scandals involving ministers

became a key news staple, while cynicism reached alarming proportions among both

the political elite and the public opinion. While the sharply deteriorating state of the

economy was temporarily concealed, the crisis was gradually acquiring systemic

proportions, affecting large parts of the state.

       The slow disintegration of the Greek public sector broadcast some early and

very serious warning signals. In summer 2007, a series of bushfires in the

Peloponnese and other parts of southern Greece killed 80 people and turned

275,000 hectares of forest and farmland–approximately three percent of Greece’s

territory– into ashes. This was by far the biggest natural catastrophe in Greece’s

recent history, which was accentuated by the sheer inability of state authorities to

protect the natural environment, as well as human lives. Despite this and thanks

again to lavish public spending, Karamanlis was able to win by a wide margin the

early elections held in September 2007. Worse was yet to come. In December 2008,

following the killing of a youngster by a policeman in Athens, riots wrought havoc in

the centre of Athens. State buildings and shops were looted and set on fire by

mobsters, while the government and police reduced themselves to the role of

bystander. Damages were estimated to be over 200 million Euros. Athens city centre

appeared to be in a state of anarchy for several days for the first time since the end

of the Second World War.

       While both these powerful warning signals were in effect ignored by both the

political elite and the public opinion, they were both linked with the failing state of

the Greek economy and the public sector. Easy lending in the early 2000s appeared

to be a poisoned gift, as it allowed structural deficiencies to be ignored until they

reached virtually irreversible proportions. This is not to say of course that the

decision to join the Eurozone was not the right thing to do. Yet the Greek political

elite had to make it clear that this move could have disastrous consequences, were it

not followed by responsible and innovative economic policies. Joining the Euro

absent a simultaneous and lasting rationalization of the country’s economic policies

proved a key moment of Ate in this modern Greek tragedy.

The Moment of Nemesis

According to Warren Buffet’s adage, “it's only when the tide goes out that you learn

who's been swimming naked.” The global financial crisis that began in 2007 set the

conditions for the moment of nemesis. Formerly abundant liquidity rapidly

disappeared from the markets, exposing countries addicted to high levels of

borrowing to unprecedented risks. Greece was one of them.

       The elections of 4 October 2009 came as a surprise to many. It was only two

years ago that the ruling ND party had won a clear victory against PASOK, and Prime

Minister Karamanlis looked as the undisputed master of Greek politics. His

announcement in early September 2009 that he would lead the country to early

elections, due to the dire state of the economy and the need to urgently take harsh

measures shocked many. It appeared as suicidal and proved so. His party suffered

the gravest defeat of its almost 40-year history, and PASOK came to power with a

comfortable parliamentary majority. New Prime Minister George Papandreou would

soon, however, comprehend the gravity of his mission. When the Finance Minister

George Papaconstantinou announced a dramatic revision of the country’s financial

statistics, the crisis started taking its true dimensions. The country’s current account

deficit was first raised to 12.7 percent and finally to 13.6 percent of the GDP. This

was more than double the official figures of the ND administration. The debt-to-GDP

ratio was also modified first to 113.4 percent and finally 125 percent. The Greek

public debt was also estimated to exceed 300 billion Euros. These dismal figures had

a shock effect on Greek bond markets. Yields and spreads between Greek and

German bonds reached all-time highs, and Greece rose to the top of the most-likely-

to-default country list. Borrowing rates became soon prohibitive for the Greek

government. After hesitation, the Greek government announced an unparalleled

austerity measures program aiming to reduce the current account deficit to 2.5

percent within two years. Yet markets appeared unconvinced about the plan’s

feasibility. Given the country’s imminent liquidity needs, the only way to avert a

near-term bankruptcy was to seek international support. Despite his initial

resistance, George Papandreou announced on 23 April 2010 that his government

had agreed to receive financial aid by the European Union and the International

Monetary Fund (IMF). His announcements failed to prevent Standard and Poor’s

decision four days later to downgrade Greek bonds to junk level. This was an

extraordinary decision for a Eurozone member and a turning point for market

sentiment, which effectively froze the Greek bond market. On 2 May 2010, an IMF-

EU-backed bailout was agreed. Both would commit up to 110 billion Euros to help

Greek government refinance its deficit and debt without recourse to the financial

markets, while the country enacts giant cuts and fiscal reforms. Additional aid was

secured on 9 May 2010, when a much more comprehensive plan was agreed

between the EU and the IMF. 750 billion Euros were committed to the rescue of any

Eurozone economy that might face financial difficulties. 440 billion would come from

Eurozone government, 60 billion from an EU emergency fund and 250 billion from

the IMF. In return for this enormous aid package, the Papandreou government

committed itself to the implementation of the most far reaching economic and

political reform program in decades. The rationalization of the country’s social

security system, the removal of the numerous still extant barriers to free market, a

sharp decrease in public sector salaries and benefits, an extensive privatization

program were only a few of the terms of a memorandum signed between the

lenders and the Greek government. The implementation of the memorandum terms

would be periodically inspected by the lenders and would comprise a condition for

the payment of the following loan installment.

       In addition to its own, self-inflicted heavy structural and fiscal burdens,

Greece also fell victim to the growing economic uncertainty throughout the

Eurozone, as well as speculation about the viability of the Eurozone itself. Ten years

after the introduction of the common European currency, the global economic crisis

revealed some of the Eurozone’s own structural deficiencies. It became clear that

decoupling the monetary and the fiscal union of Eurozone member states would no

more remain a viable option. Eurozone members –and most importantly Germany,

the strongest economy of the European Union– would soon face the dilemma of

moving fast ahead towards the completion of European economic integration or else

risking the disintegration of the Eurozone. While Greece represented only 2.5

percent of the Eurozone economy, it had become remained its financially weakest

member and hence more susceptible to capital market vicissitudes.

       Nevertheless, despite the EU-IMF bailout and the commitment of the Greek

government to the most comprehensive fiscal austerity and structural reform

package of the last decades, markets remained skeptical about the feasibility of the

rescue plan, given the probability of a sharp recession. While the bailout plans

prevented the risk of an immediate Greek bankruptcy, it could not by itself address

the underlying reasons for the dire state of the Greek economy. A long debate has

ensued on whether it would be possible for Greece to repay its debt under the terms

of the memorandum, without resorting to some sort of restructuring in the medium

term. In addition, the markets priced all the structural deficiencies they had for long

ignored and questioned not only the willingness but also the ability of the Greek

political elite to implement the promised reforms. Having deferred the resolution of

deep fiscal and structural problems for nearly three decades, Papandreou’s

government appeared to many as undertaking a mission impossible. Implementing

the terms of the EU-IMF memorandum not only entailed painful economic sacrifices

for the vast majority of the Greek population. It also implied a radical reconfiguration

of the country’s social, economic and bureaucratic model, which bore similarities

with the transition of Central and Eastern states in the aftermath of the Cold War.

Sharply reducing the size of the state, as well as its role in the economy, terminating

the corrupt links between the state and a part of the country’s economic elite,

reintroducing an esprit de corps in a drastically reduced bureaucracy, instilling

learning, creative and entrepreneurial spirit to the youth through a reformed

meritocratic education system all appear to be necessary steps. They require though

a courageous political elite, able to withstand severe popular reaction in the initial

steps of the reform process. Some argued that it would be irrational for a political

elite which has been –to a large extent– a product of this dysfunctional system to

promote measures which would eventually but inevitably lead to its demise. It is the

painful but didactic features of the Greek crisis that have made it clear to the Greek

political elite and public opinion that the economic and social model of the last thirty

years is now defunct and that there is no other viable solution for Greece but radical

reform. This realization is the key moment of nemesis in the Greek tragedy.

The Moment of Catharsis

According to Aristotle’s classic definition, tragedy is “an imitation of an action that is

serious, complete, and of a certain magnitude…..with incidents arousing pity and

fear, wherewith to accomplish its catharsis of such emotions.” One cannot be certain

about the moment of the catharsis in this ongoing Greek tragedy. The success of the

Greek reform plan depends heavily on the determination of the current Greek

government to stick with it, notwithstanding social and political opposition. It is also

a function of the course of the global economy, and the Eurozone in particular. Yet

one can be sure about the content of this catharsis whenever it occurs. It will entail

the liberation of Greece’s creative and productive social, political and economic

forces which have been trapped and unduly punished during the last thirty years.

These could swiftly restore Greece’s injured international profile into its potential: a

model democratic regime and successful Eurozone economy, spearheading regional

integration in Southeastern Europe, the Black Sea and the Eastern Mediterranean.

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